Signature Resources Ltd (CVE:SGU): Risks You Need To Consider Before Buying

If you are a shareholder in Signature Resources Ltd’s (TSXV:SGU), or are thinking about investing in the company, knowing how it contributes to the risk and reward profile of your portfolio is important. Broadly speaking, there are two types of risk you should consider when investing in stocks such as SGU. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. The other type of risk, which cannot be diversified away, is market risk. Every stock in the market is exposed to this risk, which arises from macroeconomic factors such as economic growth and geo-political tussles just to name a few.

Not all stocks are expose to the same level of market risk. The most widely used metric to quantify a stock's market risk is beta, and the market as a whole represents a beta of one. A stock with a beta greater than one is expected to exhibit higher volatility resulting from market-wide shocks compared to one with a beta below one.

What is SGU’s market risk?

Signature Resources's beta of 0.19 indicates that the stock value will be less variable compared to the whole stock market. This means that the change in SGU's value, whether it goes up or down, will be of a smaller degree than the change in value of the entire stock market index. SGU’s beta indicates it is a stock that investors may find valuable if they want to reduce the overall market risk exposure of their stock portfolio.

Could SGU's size and industry cause it to be more volatile?

With a market cap of CA$6.05M, SGU falls within the small-cap spectrum of stocks, which are found to experience higher relative risk compared to larger companies. In addition to size, SGU also operates in the metals and mining industry, which has commonly demonstrated strong reactions to market-wide shocks. Therefore, investors may expect high beta associated with small companies, as well as those operating in the metals and mining industry, relative to those more well-established firms in a more defensive industry. This is an interesting conclusion, since both SGU’s size and industry indicates the stock should have a higher beta than it currently has. A potential driver of this variance can be a fundamental factor, which we will take a look at next.

Is SGU's cost structure indicative of a high beta?

During times of economic downturn, low demand may cause companies to readjust production of their goods and services. It is more difficult for companies to lower their cost, if the majority of these costs are generated by fixed assets. Therefore, this is a type of risk which is associated with higher beta. I examine SGU’s ratio of fixed assets to total assets to see whether the company is highly exposed to the risk of this type of constraint. SGU's fixed assets to total assets ratio of higher than 30% shows that the company uses up a big chunk of its capital on assets that are hard to scale up or down in short notice. As a result, this aspect of SGU indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. This outcome contradicts SGU’s current beta value which indicates a below-average volatility.

What this means for you:

SGU may be a worthwhile stock to hold onto in order to cushion the impact of a downturn. Depending on the composition of your portfolio, low-beta stocks such as SGU is valuable to lower your risk of market exposure, in particular, during times of economic decline. What I have not mentioned in my article here are important company-specific fundamentals such as Signature Resources’s financial health and performance track record. I urge you to complete your research by taking a look at the following:

1. Financial Health: Is SGU’s operations financially sustainable? Balance sheets can be hard to analyze, which is why we’ve done it for you. Check out our financial health checks here.

2. Past Track Record: Has SGU been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of SGU's historicals for more clarity.

3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com

Simply Wall St analyst Simply Wall St and Simply Wall St have no position in any of the companies mentioned. This article is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.